Starting to build credit

March 28, 2005 8:12 PM

As a young person with a pretty much blank credit history, I'm looking for ways to start building solid credit for the future (more inside)

Quick summary of the situation:

I'm 24, been out of college for two years. I paid my way through with scholarships and grants, so I don't have any loans in my history. I own my car outright.

After college I spent a year at home (family medical issues, I needed to be around to help out), but last October I moved out on my own for the first time. I had a decent job during that year, but I'm now self-employed (web geek) and loving it.

Since moving out I've paid my rent and other bills promptly (only smudge is a $1.86 fee on my cell-phone bill because the USPS got my payment there one day late), but I'm looking at my future and wondering what the best way is to build up a strong credit history for things like buying a house, getting car loans, etc.

One suggestion a couple people have made is that I should get a credit card (I've never had one) and occasionally put something small on it and pay it off; I've got an offer from my bank for a decent-looking card, and that's certainly on my mind as an option, but I've never cared for credit cards and I'd like to know what else is out there.

A quick glance at the archive revealed lots of people asking about credit consolidation and such, but nothing that I could find about how to start a good credit history, so: what do you know about building credit?

posted by ubernostrum to work & money (22 comments total)

Get a credit card, buy stuff with it now-and-then, pay your bills on time, maintain a greater-than-zero balance you are comfortable with. Maintaining a balance is important. If you always pay your bill in full you wind up paying no interest and therefore look bad to a finance company.
posted by mexican at 8:26 PM on March 28, 2005

Upon arrival in the US, despite more than a decade of credit history (great) in Canada, I was ineligible for a credit card, so I got a secured credit card. You basically deposit $500 or whatever in an account, don't earn interest on it, and you can borrow from it using the card. And then you pay it back. When you close the account you get the $500 back. It is a good way to build up a credit history and very soon I was able to get a "real" credit card, and then they just throw credit limit at you.

Doesn't sound like you need the secured option, but figured it might apply to someone reading this?
posted by stevil at 8:31 PM on March 28, 2005

maybe a gas card would be a good start? pick a favorite station and stop by and get an application and charge all of your fuel purchases. after a while of that, get a credit card (you should be able to get a nice limit by now) and then buy yourself something really nice and pay it off. so long as you're not late on your payments, your limit should go up over time.

oh yeah, and try to find an institution that will let you check your balance online.
posted by mcsweetie at 8:42 PM on March 28, 2005

Go to a bank and get a savings account (or a Certificate of Deposit, etc.). Then take out a modest loan, using the savings/CD to secure the loan. Make all your payments on time (don't just pay the minimum - pay it off within 6-months to a year (depending on how large). Rinse & repeat. Use that as the basis for a history to get a credit card. Then go someplace where you can use that history to get something you need (furniture/Sears, etc.). Buy something on one of those no interest if paid off in 6-12 months deals. Pay it off before the grace period's over. You should be well on you way by then....
posted by Pressed Rat at 8:43 PM on March 28, 2005

It's really weird, but I was able to get a credit card never having had one before, through Paypal (I use their services a lot). It's worth a shot, if you're looking to get a credit card and you're eligible, and the Providian site where you can look at your balance/make payments is really great- you even get to see your credit score, provided by TransUnion, on a monthly basis.
posted by ThePinkSuperhero at 8:47 PM on March 28, 2005 [1 favorite]

Maintaining a balance is important. If you always pay your bill in full you wind up paying no interest and therefore look bad to a finance company.

heh?? i've never heard this before. sounds like a waste of money to me.

i'd say just apply for a credit card and see what kind of credit limit you get. If you don't really use it they'll probably just keep gradually increasing your limit to entice you to use it.

overall though, I wouldn't worry about it too much. If you have your school and car paid off, you already are far ahead of a lot of people in terms of credit history.
posted by jacobsee at 8:48 PM on March 28, 2005

You have to use it and carry a balance for them to raise your credit score (and limit)--they really have no use for people who buy stuff and pay it all off right away. Say, if you have a 1000 limit--buy something for 400 to 600 and pay a little more than the minimum for a year before paying it all off.

In the olden days, we got department store cards first (which had higher than normal interest rates), and then that established our credit for regular cards. That was before the credit companies invaded campuses, tho.
Funnily enough, Experian, one of the reporting companies, suggests a dept. store card too.
posted by amberglow at 9:01 PM on March 28, 2005

Maintaining a balance on credit cards doesn't help your credit score. What matters is: no late payments, average length of time your accounts have been open, and the ratio of outstanding debt to available credit.

It's pretty easy to get a credit card. You should probably get two. Put a small monthly bill on each one and make sure to pay them both off at the end of the month. (It is possible for the bank to close the account for inactivity.) Keep those accounts open forever with no negative marks and your score will be pretty good.
posted by mcguirk at 9:11 PM on March 28, 2005

A line of credit from a department store for a furniture purchase might be a good bet. They often have 6-months-no-interest deals. Plus, at age 24, maybe it's time to have a real couch.
posted by matildaben at 9:13 PM on March 28, 2005

Also, you can check your credit report from all three agencies for free once a year using annualcreditreport.com (not available in some states for a few more months; check the site), so you should do that. You won't get the actual numeric scores without paying extra, but you can view the text of the reports and make sure there's nothing negative on them.
posted by mcguirk at 9:21 PM on March 28, 2005

Credit scoring is simply an actuarial game; they use factors that are predictive of your likelihood to pay back money on time. From this page (which claims to be "the consumer division" of the company that invented the credit score):

Things that are taken into account:
- Payment history
- Amounts owed
- Length of Credit History
- New Credit (including inquiries!)
- Types of credit used


Things that are not taken into account:
- race, religion, etc.
- age
- salary, occupation, title, length of employment (though "lenders may consider this information")
- where you live
- whether or not you're participating in credit counseling
- (etc)

So, it looks like your self-employment won't hurt your score, which was a bit surprising to me, though banks still might not like it at loan time. But one point is that applying for new credit actually LOWERS your score, albeit just a bit. Shouldn't be a problem to just apply for one card.

And I'm skeptical about the claim that they consider it a negative to pay off your balances in full every month, for two reasons. First of all, paying off in full is way, way better than being delinquent, and even the most parsimonious credit card user will probably carry a balance sooner or later (and if you don't, CC companies still get a per-transaction fee from merchants). Secondly, the credit score is used outside of the CC context, for things like loans, where the interest is front-loaded and taken into account in every payment. I can see Visa being hesitant to take your business if you pay too quickly (though not really, for the reason I just mentioned), but I think your average bank would be delighted at that prospect. They have early payment penalties if you get too far ahead on your loans, after all.

So, yeah. Get 1 credit card, but don't go nuts. Pay it off as quickly as you're comfortable with (but never late). If you're nervous about your credit score, pay $30 to join CreditExpert.com (or one of its zillions of competitors) for a year and monitor it. Good luck with your home loan, when the time comes.
posted by rkent at 9:31 PM on March 28, 2005

The only reason to carry a balance on a credit card (other than to take advantage of a zero percent offer) is to try to induce the credit card company to increase your limit. It's not clear that a balance really will help. Carrying a balance absolutely will not help with your credit score, in itself, because this fact isn't reported to credit bureaus. If you want to increase your credit limit (a good idea, if the goal is to improve your ability to borrow in the future - say, to buy a house - then pay off your balances for a year or two, and then ask your credit card company for an increase in your limit. They do make money even if you carry no balance - through merchant fees - so they do have an incentive to raise your limit, to encourage you to use it more.

Also, there are a lot of reward cards out there (1% cashback); if you can't get one now, good credit in the future will get you to where you do qualify.

Credit unions often take a more individual (non-computerized, non-cookie-cutter) approach; if you can find one you're eligible for, you should think strongly about dropping in and talking to someone about this whole credit thing.

Finally, if you have any significant equity in your car (if it's more than just a junker), you can probably borrow against that (again, a credit union probably is easiest) - say, a year or two of payments, a few thousand dollars or so in all, and build up your credit that way.

Good luck!
posted by WestCoaster at 10:06 PM on March 28, 2005

WestCoaster: the offer from my bank includes a rewards program (cash back and/or assorted things like airline miles), but I'm not too concerned with that right now. I'm going to call them tomorrow and try to get more details. I'll look for local credit unions, but depending on the details I may just go with the bank; I trust them, and getting it through them means I only have to worry about one institution. Plus they'll let me set up things an automatic bill-pay where I could put some of my montly expenses on the card and pay off the balance directly out of my checking account.

My car is worth exactly $4,217 (I know because my property tax was just assessed and they list the value), but I don't honestly know what I'd do with a loan against it. To be honest, I'd probably invest the money somewhere and try to make more interest than what the bank charges on the loan...
posted by ubernostrum at 10:26 PM on March 28, 2005

maintain a greater-than-zero balance you are comfortable with.

Wow. I'm glad this has been shot down several times already. Not only is it false even if it were true it's bad advice. Not many people can judge what would be a 'safe' balance to maintain, it gives away money, and situations change. So that comfortable amount you maintain may be a noose around your neck when you lose your job.

Pay off your credit cards.
posted by justgary at 1:01 AM on March 29, 2005

You have to use it and carry a balance for them to raise your credit score (and limit)

This is simply not true. My mother and I got a credit card together when I was 17 and couldn't get one myself, but needed it for while I was overseas. It had, at that time, a $1000 credit limit. We've never missed a payment, never carried a balance, and never paid a cent in interest. Our credit limit on that card is now $8300. We've also, I'll note, never asked for an increase in our credit limit.

I got a personal card about 4 years ago, with a $5500 credit limit to start. I missed one payment, never carried a balance and paid $1.28 in interest. I never charged more than $500 on the card in a single month. The credit limit on that card had crept up to $9200 before I called them and told them to back it back down to $5500 because I didn't need or want $9200 in available credit. I never asked for an increase in my limit on that card, either, since it's 11 times higher than I've ever needed it to be (mostly because I use the other card which has a much better rewards program, mind you).
posted by jacquilynne at 5:26 AM on March 29, 2005

Carrying a balance absolutely will not help with your credit score, in itself, because this fact isn't reported to credit bureaus.

Can you point out where you found this information? I checked my credit scores around a year ago using myfico.com (better than trying to check with Experian/TransUnion/Equifax seperately, besides the fact that their scores aren't the actual scores your lenders see -- the FICO score is), and my FICO report stated my only negative against me was a relatively high balance on my credit card. So even if the amount of your balance isn't reported, it seems as if the percentage you've used of your credit line is.
posted by patgas at 6:09 AM on March 29, 2005

I was in the same boat as stevil. I moved from Canada to the US and couldn't get a credit card due to a lack of credit history. My way out was noticing all the Discover offers I got and applying for one. I kept a minimal balance, paid on time and pretty soon I could get a more known credit card and could qualify for an excellent mortgage if I wanted.
posted by substrate at 7:10 AM on March 29, 2005

Your account balances typically are reported to the credit reporting agencies each month -- but there is no way to know whether you are carrying that balance. For example, my apartment complex offers to let me pay my rent via credit card. I do so using a rewards card, but I pay that off every month. Depending on when this card reports to the CRA, it may look like I "always" have about a $1000 balance on the card. Or if they report right after my payment date it'll look like I never have a balance. It's totally a matter of timing, and I expect lenders understand that.
posted by kindall at 9:03 AM on March 29, 2005

A few tips:
- Get your credit "scrore". There are three sources; Equifax, Experian and Transunion. You can get your history, for free mostly, from AnnualCreditReport.com. (Just double-checked, Virginia residents have to wait until September for a free report. But get yours anyway, from all three sources.)
- Having a few (3 or 4) credit cards of any kind (Visa/MC/Discover, gas, department store, etc.) is better for your score than only one. (It's also better than having 7 or 8.) But be careful of the high interest rates of, say, department store cards.
- Pay all your bills on time.
- Make a budget, stick to it, tweak it as needed. (This doesn't go to your question, but will help you in the future.)

Good luck!
ObscureReferenceMan (aka ObsessiveCompulsiveFinancialGuy)
posted by ObscureReferenceMan at 10:43 AM on March 29, 2005

patgas - kindall has it exactly right -- credit card companies report a "snapshot" of a customer's status. And you're correct that the percentage of a credit balance that is used is considered important. For example, if someone has three credit cards with a total line of credit of (say) $25,000, and the balance reported (combined) is $20,000, red flags may well go up. Moreover, if that person makes $60,000 per year, then if he/she has applied for credit (and provided income information), a computer can clearly figure out that he/she has to be carrying a balance from month to month (since he/she wouldn't be charging more than $3-4,000 per month on the card). That also impacts credit scores. (Compare someone with income of $400,000 per year, credit limits totalling $100,000, and the same $20,000 balance - it's more than likely that this person pays the balance in full each month.) [To answer the question - among other things, I've read thousands of credit applications and reports while on a loan committee at a credit union.)

Why don't credit card companies report "balance carried" to credit card scoring agencies? Among other reasons, because they don't want other companies "poaching" these customers. People who pay on time, AND carry large balances, are the golden geese of credit card companies.

ubernostrum - if you do go the route of borrowing a thousand or two dollars against your car (I'm not sure it's worth the trouble), you should do exactly what you mention - stick the money someplace else, and use it to pay back the loan. If you pay (say) 8% interest on a $2000 loan over (say) 18 months, total interest would be on the order of $200; if you earn (say) 2% of the money (in a savings account), then you've in essence paid $150 to improve (I think) your credit history. If you really want to buy a house in (say) two or three years [there are good reasons to rent, not own, depending on your circumstances], then this may be worth it; otherwise, maybe not.
posted by WestCoaster at 11:35 AM on March 29, 2005

If you decide to get a credit card, I suggest an American Express card. You have to pay AmEx off every month, so it gets you into the habit of not spending more than you have, an easy thing to do with other credit cards.

The downside is there's an annual fee, but it comes out to a few dollars a month, which matches the interest paid on your typical credit card with a balance.
posted by me3dia at 12:00 PM on March 29, 2005

WestCoaster: thanks for your responses; I'm going to go ahead and talk to the bank about getting the card, and maybe in a couple months start looking at the possibility of doing the loan thing.

me3dia: I've been offered a Visa with no annual fee. I'd only ever be using the card as a tool to build credit, so I'm not worried about the possibility of spending too much with it. Plus, well, most places take Visa ;).

Nice to recognize a fellow TXDer, though, I wonder how many of us are here?
posted by ubernostrum at 3:36 PM on March 29, 2005